NBNCo CEO Mike Quigley Doesn’t Like The Libs Broadband Plan

This is a direct quote from the internet:
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KEVIN MORGAN COMMENT: What kind of network can you get for $43b?

Posted on May 6th, 2010
The NBN implementation study appears to have been reversed engineered in to the government’s original cost estimate – it’s a post hoc rationalisation for spending $43 billion.

To get the costs within the original estimate there are some extraordinary assumptions: foremost amongst which is the government gets no return other than its cost of borrowings on the $26 billion it injects to help fund the $43 billion rollout. The government might start to get money back after year seven, with possibly $10 billion returned by year 11 and $20 billion by year 15.

Significantly, the study confirms that the original concept of a joint private sector investment was utterly flawed because private investors would have expected 20% plus in the early years.

Under the revised ‘business case’, private equity through privatisation would not be introduced until at least 15 years into the project, by which time there might be some retained equity and government equity will have been replaced with government guaranteed debt to give a typical 50/50 debt equity ratio.

With privatisation, the government might get its remaining equity back and if the NBN enjoys, as the study foreshadows, overbuild protection, then private investors will enjoy a monopoly built on free taxpayers funds.

If the assumption the government will fork out S26 billion to earn negligible return is bizarre, then the assumption take up rates will exceed 70% and could approach 90% is heroic.

This compares to FTTH take up rates in the USA and Holland which have levelled off at 30%.

Despite such realities, the study argues the attractions of fibre for RSPs will drive take up to effectively 100% of fixed line households. Bear in mind 20% of Australian households don’t have a computer. Nevertheless, the study believes consumers will be won over by RSPs offering retail services built on an entry level 20Mbit wholesale offering.

But this $30-35 wholesale access price could well more than double with retail mark ups: so will consumers—especially those who just want the equivalent of a standard telephone service be keen to migrate when they only pay $30 per month for access now?

True, that a 20 Mbit wholesale product has far greater functionality. That’s the key to winning over the RSPs who then will then migrate customers over to the NBN but given RSPs can already offer 8-20 Mbit ADSL 2 on near fully depreciated DSLAMs for an access fee of $15 over copper in metro areas will they rush to the NBN? They will be foregoing a $15 per month margin.

In summary there is little to support the penetration rates suggested by the study—other than the implicit threat of overbuild protection. This means the study is effectively predicated on a de facto monopoly which raise significant competition policy concerns.

NO UNIFORM PRICES: Nor will access prices be nationally uniform. Although the study recommends that access prices should be uniform over fibre they will not be uniform across the multiple NBN platforms.

And even the uniform wholesale access price on fibre will not guarantee uniform national pricing for fibre access. Retail prices will be distorted by backhaul and other costs so the more remote the area served, the higher the backhaul cost and the higher the retail charge.

The study notes “Even if NBN Co charges uniform wholesale prices for the access network, its services are not the only inputs to retail.. There are some parts of the country where a significant retail price increase would result from cost-based pricing of backhaul. “

In line with government policy, the study recommends NBN Co build competitive backhaul meaning some $3.5—$4 billion will be spent on up to 70000 kms of backhaul that duplicates Telstra’s network. These routes which are loss making for Telstra and will be in need of continued subsidy – a reality implicit in the suggestion that backhaul should be retained in government hands on privatisation although this is rationalised on ‘competition’ grounds.

High back haul costs are not the only bad news for rural users. There is no firm recommendation to deal with universal service other than to admit that Telstra can no longer really be expected to carry the USO if the NBN becomes the de facto national fixed network. Given the study admits there will be no uniform pricing across platforms, and rural retail prices would be distorted by backhaul costs, this might well prove the end of universal service.

COST ESTIMATES DOUBTFUL: There are other issues which the study doesn’t fully deal with. Cost estimates must be deemed questionable given the initial build will merely pass homes with NBN Co with subsequently staggering retail connections. This will be highly inefficient with repeated visits to neighbourhoods, if not the same street. Installing the drop and ONT could account for 40% of capital (build) costs and may not be done in the optimal way. And given that the study envisages significant amounts of trenching for areas where the network must go underground the total build costs will be understated.

Quite simply the study’s basis for its cost estimates are unclear and given that a few weeks ago, at the industry briefings, NBN Co could not give the comparative costs of aerial versus underground it’s curious that the consultants have such firm understandings of costs. In contrast NBN Co won’t know comparative costs until they complete their five field trials.

Ultimately, though the business case for FTTH rests on retail pricing which the study is obviously silent on. Whilst the minister referred on the release of the study to the tariffs for the Tasmanian trial there is no understanding in the industry of the costs they will have to pass on to end users such as backhaul, provision of layer 3 and the costs of actual services. Consumers will also have some considerable costs in rewiring their home to take advantage of 100Mbits—especially HD TV which will require internal cabling even if broadband can be distributed within the house by wireless. This may be a disincentive.

In conclusion, the study reveals little other than if you set the hurdle for investment low enough (negligible or no return) you can build a business case.

The NBN’s rationale has switched from a commercial rollout to one justified by economy wide gains (externalities) which cannot be quantified and which aren’t dealt with in the study. Consequently. we don’t know if the NBN offers value for money as it doesn’t consider the cost of alternatives to deliver higher speeds – that would require a cost benefit analysis which the government hasn’t commissioned.

Kevin Morgan
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a very recent interview with Kevin Morgan can be heard on 2gb website – it makes for an excellent technical argument.